Deflation, an alternate look

[bart]

Given all the opinions and discussions surrounding what "total money supply" actually is and the confusion on whether we actually have disinflation or deflation, here's an alternate look at the area.






Very few disagree that M3 is a part of total money supply or that in the current environment and culture that credit itself is not money, per the basic definition of money as a medium of exchange. Credit in the above chart represents the total of the following types of credit: consumer, bank, credit card, real estate and commercial/industrial.

Federal government debt may not be, although I submit that it is, but even if it is not included in the above attempted proxy to actual total money supply, it just makes the chart more deflationary in the sense of less total money supply. I have also chosen to exclude any data on derivatives not only since its somewhat controversial but also its inclusion would make the above chart even more deflationary.

As covered here on iTulip in many places, debt deflation ( http://en.wikipedia.org/wiki/Debt_deflation ) does exist and the value of outstanding credit balances have unquestionably been dropping due to issues like the drop in housing and real estate values.

So, how do we try and represent the reality of debt deflation?

I've chosen to use 2/3 of the drop in the BKX, the Philadelphia Banking Index, as a conservative proxy for debt deflation.

As a specific example, two thirds of the BKX drop since its June 2007 peak translates to about 45%, so the current value of total credit is expressed in the chart as 55% of the actual total credit value. That translates to a debt deflation loss in dollars of about $9 trillion net in the credit portion of total money.



For reference, here's the same chart but without the BKX adjustment for debt deflation in the credit portion of the total.



The large very recent jump is mostly due to the huge leap in government debt.
The actual bottom was established the week of July 14th too, which correlates quite well with Finster's FDI.


One final note - neither chart covers either the concept of monetary lags or of velocity.